The All Party Parliamentary Group (APPG) on Blockchain was set up in January 2018 with a purpose of ensuring industry and society benefit from the full potential of blockchain and other distributed ledger technologies (DLT) making the UK a leader in Blockchain/DLT’s innovation and implementation

Evidence Meeting 3: Business Models and Competitiveness

The group discussed the impact of blockchain technology ON BUSINESS MODELS AND COMPETITIVENESS with a purpose of understanding how blockchain and DLTs transform business models and what it means for competitiveness and competition policy.

III. SPEAKERS

Richard Crook, Head of Emerging Technology, RBS

Matt Law, Partner and Head of Operations, Outlier Ventures

Ian Hunt, Independent Consultant

Robert Kay, CEO, Disc Holdings

IV. QUESTIONS FOR INSPIRATION

What are the blockchain business models and what are the new sources of corporate competitiveness in using blockchain technology?

What are the trade related aspects of blockchain that competition policy need to consider?

V. SETTING THE SCENE

The group met on the 26th June to discuss the impact of blockchain technology on business models and competitiveness. There seemed to be a consensus amongst the speakers that the government needs to break the hiatus on Blockchain and Distributed Ledger Technologies and start to set a leadership example regarding the utilisation of these technologies.

Network affects, the speakers agreed, would mean efficiency could cause an ‘order of magnitude reduction’ in terms of investment and thousands of man-hours would be saved for financial institutions.

The speakers encouraged the government to interact more with regulators and the FCA for the purpose of engaging in new regulatory processes.

As Mergers and Activities operations will start to fall away, and monopolies will eventually be minimised, competition will change as more control will be put in the hands of customers and out of the hands of CEOs.

VI. DLT AND BLOCKCHAIN IN BANKING

Richard Crook, Head of Emerging Technologies from RBS discussed the importance of distinguishing between Blockchain and Distributed Ledger Technologies. Blockchain, he said, could be considered to be part of the ‘family’ of which blockchain is a part.

The investment banks’ use of these technologies can be seen as a part of the wholesale banks moving from intra-house activity to inter-house activity. Currently, thousands of man years are taken each year to mitigate the lack of direct contact between ledgers. DLT helps a lot of banks solve this exact problem and save thousands of man-hours.

The IMB Hyperledger project in the UK means challenges can be found in that crypto-businesses are struggling to get bank accounts – and this is a continued source of interest by the FCAs position for the regulator.

Ian Hunt, an Independent Consultant our next speaker suggested that where asset owners have traditionally played a passive role, regulators allow more control with Distributed Ledger Technologies. Custodians of control, in the future, will belong to the customers and influence will be redistributed away from CEOs. This governance challenges provided by these technologies, said Ian, means the government must work hard to help institutions understand this regulation and break the hiatus in government which appears to have occurred with the introduction of this technology.

Christopher Sier, Professor at Newcastle University Business School and Chair of FCA working group on disclosure of costs and charges for institutional investors

Guest Contribution

In principle, ICOs are an excellent way of raising capital as they offer the potential for instantaneous secondary market liquidity, and near-zero marginal cost value-transfer. However, an ICO represents the raising of finance without any of the obligations.

Generally, people buy equity for the asset value increase and/or the concomitant dividends. Or, people make loans for the interest they will earn. On what basis would they give money to the company raising money through ICO?

The only possible reason is to participate in the sentiment-based increase in value of the ‘coin’ they ‘buy’. And this has no empirical basis. I consider ICO’s as therefore being highly, highly suspect until such a time as they are asset-backed in some way. I have reported several ICO’s to various regulators globally that I have felt were raising money (and especially over-raising) on the basis of…nothing.

Digital identity is key to fraud prevention. I’m launching with Barclays a national academic grand challenge in the next 4 weeks on exactly this topic, most especially in relation to fraud directed at the financially excluded and the otherwise vulnerable.

£250bn to £300bn per annum – I’m starting with this to get your attention. The single greatest opportunity for DLT is the removal of intermediaries in the savings and capital markets supply chain by concatenating complex and manual process and multiple intermediaries through end-to-end technology predicated on DLT.

One of my roles is Chair of the FCA enquiry into this issue of the cost-base of capital markets and I have set a group of standards to collect data to empirically prove the size of the cost-base of asset management. I can estimate at this time though based upon various studies (by me and others) and this number is best expressed at a % of total assets under management.

In the UK this number is ANNUALLY 3% or more of £8tn. Or £250-300 billion pound per year. So this is the market size an innovator could attack. If this is reduced to a much lower cost base, the value saved will impact consumer savings as these savings will be uplifted by a concomitant amount. (Up to 3%).

As a 1% uplift in the performance of savings will double the size of a pension pot in 47years, please imagine what a 3% uplift will do. The downside is that there will be a shortfall in immediate taxation as intermediaries disappear and employment in the sector falls. But the consumer will gain in the longer term. Please see the presentation I have sent before on this subject.

Matt Law, Partner and Head of Operations, Outlier Ventures

APPG Speaker

Blockchain business models

Value Chain Disruption

Blockchain technology commoditizes the transfer of ‘value’ in a network. The Internet reduces the digital transaction costs for communication and data to zero. Blockchain technology supercharges this trend by adding a payment mechanism into the technology and reducing the need for a third-parties to provide trust. The Internet enables anyone to move a bit, blockchains enable anyone to move a valued bit. Business Model 1: Micropayments Blockchains have at their core a ledger which can in theory support new micropayment models. For existing financial payment rails it is uneconomical to support micropayments but blockchain technology has the potential to enable individuals to pay small financial amounts for services rather than ‘pay’ in attention in existing ad-based models. This same micropayment model extends beyond human micropayments for services on the Web and is most transformational when thought about in the context of machine transactions. For example, energy grids and telecommunications.

Business Model 2: Crypto-tokens

A crypto-token is issued by a decentralised project to raise funds from the community instead of through venture funding to build the network. If the project is successful, the token will appreciate in value. The value of the token appreciation will be captured by the project and the more useful the network is to its users and developers, the stronger the network effects and therefore the higher the token price will rise. In theory, a successful project can generate sufficient revenues to be sustainable without any other revenue streams.

Business Model 3: Data marketplaces

A data marketplace is another more profound potential business model. The current data paradigm of corporate ownership of personal data is not fit for purpose. GDPR goes some way to address the imbalance, it only limits personal data that can be captured and used. A blockchain-based data marketplace would secure all sorts of health, education and private data in way that only the individual can permission. A data marketplace is an alternative to the existing ‘give data away from free’ paradigm in which digital platforms capture outsized value from data creators (us). Data is currently siloed with no business model for creators to monetise it, blockchains offers a way for people to get paid for data. Implication: Rapid convergent innovation

Open-source decentralised global networks are experimenting rapidly and it’s impossible to stay on top of developments. This is great in terms of innovation but a challenge in terms of understanding the impact it will have. We at Outlier are seeing the convergence of a variety of technologies that are typically studied separately. We are seeing blockchains be integrated into the Internet of Things market; artificial intelligence applications be built on top of blockchains; even robots that are audited by blockchains.

VII. EFFICIENCY

Ian Hunt said: “We need investment to be efficient, clean and good value, to ensure that pensions and savings are properly funded. Currently, the direct and indirect costs of investment are too high; this compounds to cause serious funding deficits, and disincentivizes a wider population from saving. The structure of investment management in the UK is inherently inefficient, with multiple intermediating entities causing cost, risk and delay. Replication of data mmaintenance, complex messaging and integration, and a blizzard of reconciliations are the norm”.

Matt Law suggested that we now have micropayments which allow us to transfer tiny amounts of value and money in between one another.

People want access to different people or pieces of data. These sorts of micropayments will be very transformational, especially with the introduction of smart cities, smart grids, etc.

All speakers noted on the effective redundancy of existing forms of transfer in this sense. Robert Kay suggested how 90% of payments made by people occur within 5 miles from their home means Credit Cards are currently an inefficient and expensive way of transferring value and information. The micropayments that Blockchain technology allows means the government can set an example and ‘encourage the development of new services through example’.

VIII. WORKING WITH REGULATORS

Regarding regulation, Ian Hunt suggested where asset owners have traditionally played a passive role, regulators allow more control. Richard Crook, RBS added that there need not be one ‘single actor’ in creating such regulation, and that the custodians of control will belong to the customers in the future, redistributing influence from CEOs.

Robert Kay from Disc Holdings believed the FCA must work hard to help institutions understand this regulation and break the hiatus in government which appears to have occurred with the introduction of this technology.

Richard Crook, RBS added that we see new standards being implemented through organizations and government which will have to strongly encourage innovation with new platforms: “we have seen in the past that these have taken some years to take effect and for standards to be implemented surrounding a new technology, therefore direct investment to encourage cautious platform planning is needed”

Matt Law, Head of Operations and Partner at Outlier Ventures said a “beneficial feature of blockchain is that it can lead to a balance, self-sustaining relationship between individuals”.

In this ‘Cambrian explosion’ of options it creates, we will see M&A activity falling away. Robert, expanding upon this, said as monopolies will inevitably be minimised, the government must work out what role it plays in this process.

Ian Hunt, Independent Consultant

APPG Speaker

We need investment to be efficient, clean and good value, to ensure that pensions and savings are properly funded. Currently, the direct and indirect costs of investment are too high; this compounds to cause serious funding deficits, and disincentivises a wider population from saving.

The structure of investment management in the UK is inherently inefficient, with multiple intermediating entities causing cost, risk and delay. Replication of data maintenance, complex messaging and integration, and a blizzard of reconciliations are the norm.

We believe that we have dematerialised assets, but our transaction processes are still structured as if we are exchanging goods for gold. Blockchain offers us the opportunity to tokenise ownership and to fully immobilise assets.

This will enable the creation of a single asset register, and a single record of tokenised ownership, to replace the multiple asset registers which currently exist. The position-keeping roles of Registrar, Depository, Custodian, Accountant, and Asset Manager can be compressed into a single definitive register.

The immobilisation of assets, together with tokenisation and the immutability of history in a Distributed Ledger, will enable us to combine the recording of a transaction with its settlement. This will allow the elimination of clearing, netting, confirmation matching and settlement instruction, and will dramatically reduce the volume of deliveries and payments.

In order to achieve a radical reduction in the cost of investment, we need to facilitate radical change. Government should support this by legitimising tokenised ownership, encouraging the issuance of fiat currency on-chain, and pressuring regulators to update their regulatory frameworks. Current regulation mandates the existence and functions of exactly those entities whose roles will be eliminated or changed by DLT.

Robert Kay, CEO, DISC Holdings

APPG Speaker

The basic business model of DISC is that using blockchain technology and smartphone applications it is possible to create simpler, cheaper and more effective payment services than those available through traditional banking providers.

The aim is to deliver to users services that help them manage their finances more effectively and live their financial lives in the same way they live their social lives. The capabilities also assist entities such as housing associations, utility providers and local merchants reduce risk and the cost of collection of monies due to them. We call this ‘smart money’.

As examples of what smart money can achieve there are three concrete examples

a) For some years DWP and others have been asking banks to offer so called ‘jam jar accounts. These are designed to allow users to ‘lock away’ funds that will be needed to pay for rent, utilities and other essential services, so they are less likely to spend that money on ‘impulse’ purchases.

Response from the banking industry questioned the actual demand for such services and estimated costs of delivering them in the order of hundreds of millions of pounds DISC has had ‘jam jar’ accounts as a feature of its service since inception.

The cost of delivery was well under £1 million and it is used by some, though not all, customers. Some other challenger banks are now building this functionality into their services, suggesting demand is real and feedback has shown DISC that users find the process beneficial in terms of their budgeting and money management.

b) An issue for DWP is the ability to get funds quickly into the hands of customers in a crisis – so called emergency payments. The existing core process of BACS takes days and even the more expensive faster payment process can take a number of hours. DISC has proven with the DWP the ability to credit value onto a user’s smartphone directly from the DWP Central Payments System (CPS). This cannot be implemented at scale at the present time due to the priority constraints on DWP IT development, but demonstrates the value of the technology and approach.

c) DISC is working with a number of merchants (utility companies and supermarkets) to facilitate the collection of small value payments – so called micropayments.

The key is to dramatically lower costs. This in turn would enable users to pay smaller amounts more frequently. Merchants see the benefits in terms of reducing credit risk and early identification of payment problems within their customer base.

The capability could also help rent to buy providers and doorstep lenders reduce the interest rates they charge, as much of that reflects the expensive process of collection, rather than risk per se.

Ian Hunt listed a number of recommendations:

· Within the existing banking infrastructure the Bank of England (BofE) plays a key role. Final settlement of payments is made by the real-time gross settlement system (RTGS).

· Access to RTGS is for understandable reasons constrained, but at present is limited principally to the major clearing banks. BofE has recently announced its intention to allow a challenger financial institution (Transferwise) access to RTGS.

· DISC would like the government to offer encouragement to this initiative and seek its expansion to all regulated payment institutions that can meet the relevant technology, process and control requirements Government, with the money it distributes through procurement, benefits and other programmes has an interest in the cost effective functioning payments activity.

· It also has the ability to influence and encourage development of new services through example. Processes today still do too little to encourage new initiatives. Balancing the risk of the new with the stability of the present is hard, but DISC believes the balance remains too much in favour of the status quo.

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APPG Blockchain Secretariat

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